Perhaps the single biggest question that I get as a small business coach is: “Should I start-up my business as a corporation?”
To which I answer..."It depends!"
Yesterday and the day before, we talked about sole proprietorships and partnerships as business entities. Today, we'll be talking about corporations (C Corp, S Corp, and LLC).
Corporations:
The final level in complexity is a corporation. A corporation is a formal business association with a publicly registered charter recognizing it as a separate legal entity having its own privileges, and liabilities distinct from those of its members.
Regular C Corporation
Corporations are separate entities that require their own tax return to be filed (IRS form 1120).
They are taxed separately on all monies that are not paid out in expenses or bonuses or salaries. If the funds are paid out again in dividends, you could be taxed again. Thus, there is a potential of double taxation.
Moreover, corporations are very formal beasts. In fact, based on complexity and formalities involved, they are the biggest headache of all. You must have yearly stockholder meetings even if you are the only stockholder and yearly Board of Director meetings. You must have separate bank accounts, and must get an employer ID number from both the IRS and the state. In addition, some states impose some strict taxes on corporations.
Corporations, however, do have some advantages. You can deduct 100% of your health insurance premiums and 100% of any disability insurance premiums, which are tax-free benefits to the employees. They also can accumulate (with planning) $50,000 per year for future business needs and have this amount taxed at the 15% rate. If you are in the 40% tax bracket, this is a substantial savings.
Probably the main advantage is limited liability. If you maintain the formalities, your liabilities are generally limited to the assets of the corporation with the exception of malpractice suits.
Corporation also can have many different classes of stock, which is great for estate planning and for raising capital.
FYI: Because liability protection is so important in the decision whether to incorporate, I almost always recommend some form of corporation or LLC if there are employees in the business. If you have any employees, you must limit your liability.
S Corporations
These are hybrids of sole-proprietorships and corporations.
The main advantage is that they generally are not subject to double taxation. All income and losses flow through to the owners; thus, eliminating most of the double taxation problem. S corporations also limit liability just like regular corporations and are subject to the same formality requirements.
They also have two other major advantages:
- The stockholders are taxed on the earnings based on their ownership.
- You can eliminate some of your social security taxes.
With all these advantages, one would think that S Corporation would be the ideal entity. However, there are some limitations and drawbacks.
There can be no more than 75 stockholders who, for the most part, must be individuals. Moreover, S corporations can’t have several classes of stock; thus, limiting estate planning and reducing the chances of raising capital.
S Corporations have the same formalities as regular Corporations and the same paper work and meeting hassle. Certain fringe benefits are not available to S corporation as they are to regular corporations. However, you can deduct any health insurance premiums with an S corporation. While you can not deduct all of your disability insurance premiums.
Limited Liability Companies (LLC)
This is the newest addition to the business entity possibilities.
LLCs are like a sole proprietor or partnership, however, there is limited liability like that of a corporation. You can even elect to be treated as a corporation. If there is only one owner, you would file and be taxed as a sole proprietorship. If there are two or more owners, you are taxed as a partnership. LLC work well to both limit liability and not have the formalities of corporation ownership.
FYI: One big issue involves multiple owners of corporations or LLCs. What happens if you and one other own your corporation, and you don’t get along? The result has been some of the most expensive and protracted legal battles around. It is worse than a divorce. Thus, a big, big tip is that if you are incorporated or have an LLC and have co-owners, always set up a buy-sell agreement at the start. This will eliminate a lot of problems, and you will bless yourself for listening to me.
As you know from last month's issue, the announcement of Steve Jobs’ passing has me on fire and more determined than ever to help you start up your business. 
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